Design Products Is Committed to Its Quality Program

question 74

Essay

Design Products is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 2019, it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000. Product Testing has proposed to a change in the 2019 budget for a new method of testing products. If management decides to implement the new method, $2.00 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No additional savings are expected past the 200,000-unit level. The new method involves $110,000 in training costs and $60,000 in yearly testing supplies. Traditionally, 3.0 percent of all completed items must be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1.0 percent of units sold. The company carries no ending inventories.
Required:
1. What is the adjusted budget for appraisal costs, assuming the new method is implemented and 800,000 units are tested during the manufacturing process in 2019?
2. How much do internal failure costs change, assuming 600,000 units are tested under the new method and that under this new method the number of unacceptable units in the manufacturing process decreases by 40 percent?
3. What would be the change in the external failure cost budget, assuming external failures are reduced by 60 percent, assuming the same facts as in Requirement 2?

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Definitions:

Upward Communication

The process in which information flows from the lower levels of a hierarchy to the upper levels within an organization.

Formal Mission

A written statement that defines the core purpose and focus of an organization, guiding its decisions and operations.

Rational Strategy-making

The process of decision-making in business that is based on logical reasoning, thorough analysis, and factual evidence.

Top Management

The highest tier of executives and decision-makers in an organization responsible for determining strategy and direction.